The Impact of Alternative Energy on Electricity Pricing

08/01/2017 | Jaclyn Bliss

The rise of some sources of alternative energy such as renewables, storage, energy efficiency, and demand response, and decline in others—specifically nuclear—will continue to impact regional gas and electricity prices throughout the rest of 2017.

In particular, changes in nuclear power generation could play an important role. Facing economic pressure from cheap natural gas and renewable energy, roughly one-half of U.S. nuclear plants in competitive markets are at risk of early retirement.

States with pending nuclear retirements have taken two approaches to address this threat to their baseload generation: subsidize nuclear generators, or embrace substitute fuel types.

Illinois and New York have each legislated financial support for nuclear power through zero-emission credits (ZECs) in their renewable portfolio standards. These legislative solutions mean higher ancillary costs for ratepayers, and these costs will show up in their supply bills.

Michigan, Massachusetts, and New Jersey are each embracing substitute fuel types—and natural gas in particular—as a stand-in for retiring nuclear power. As these states become more reliant on gas-fired generation, they become more vulnerable to weather-related price swings, like those we saw during the notorious polar vortex in the winter of 2014.

Costs Increasing

Nuclear generators have noted a 25% jump in fuel costs during the past decade. Capital expenses have increased 109%, while operating costs jumped 13% during that timeframe. Even if nuclear retirements in Germany and Japan weaken demand for raw materials and depress fuel costs, significant measures will still need to be taken to keep nuclear power online.

Both Illinois and New York have passed legislation to protect their nuclear generation fleet, and in each case ratepayers will face higher ancillary costs.

Illinois aims to generate 25% of its energy from renewable sources by 2025. Facing closures from the Clinton and Quad Cities nuclear power plants, the state government passed a $235 million annual subsidy for nuclear generators in a Future Energy Jobs Act last December. The bill created a zero-emission standard that allowed Illinois to purchase ZECs from nuclear plants. Under the plan, Illinois utilities pay nuclear generators for the ZECs, and pass those costs on to their ratepayers in ancillary services.

Also last December, the New York Public Service Commission rejected or delayed petitions aimed to derail New York’s Clean Energy Standard. The standard requires New York to source 50% of its energy from low-carbon sources by 2030, including ZECs. Natural gas and coal generators are currently suing New York over the ZEC program and its benefits to New York’s nuclear program, which are estimated to cost ratepayers 3.2¢/kWh.

Without Legislation, Natural Gas Could Replace Nuclear Generation

The Rhodium Group estimates that without legislative action, more than 75% of the lost electricity generation from at-risk nuclear plants would be replaced by fossil generation, largely from natural gas combined cycle power plants.

According to Sue Tierney, former Assistant Secretary for Policy at the Department of Energy, nuclear retirement means that “electricity prices rise the next day, and emissions rise the next.” As Michigan, Massachusetts, and New Jersey eye pending nuclear retirements over the next two years, ratepayers in those states should anticipate sharper weather-driven volatility in their electricity prices. Some market-spurred developments include:

■ Michigan is reeling from Entergy Corp.’s unexpected decision to close the 725-MW Palisades Nuclear Plant in Covert Township. To compound matters, Michigan is facing a number of coal-generating power plant retirements during the next six years.

■ Massachusetts is preparing for the 2019 closing of the 680-MW Pilgrim Nuclear Power Station in Plymouth, which generates approximately 13% of the emissions-free power in New England. The area has become more and more reliant on natural gas, and because natural gas is still primarily used for commercial and residential heating, this reliance spells price volatility for the region.

Retiring Nuclear Plants Leading to Price Volatility

Electricity markets dominated by natural gas are subject to sharp price swings. Over the past 10 years, natural gas prices at Henry Hub have fallen as low as $1.63/MMBtu and climbed as high as $15/MMBtu. SparkLibrary estimates that at these natural gas prices, “dispatch costs for an efficient natural gas plant would be as low as $18/MWh or as high as $110/MWh.”

When nuclear generation is replaced by a fuel source widely used for heating, we can anticipate price swings like those experienced during the 2014 polar vortex to become more routine. ■

—Jaclyn Bliss is general manager for Global Energy Procurement at EnerNOC.

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